China's Coal-Fired Economy Dying of Thirst as Mines Lack Water

At first glance, Daliuta in northern China appears to have a river running through it. A closer look reveals the stretch of water in the center is a pond, dammed at both ends. Beyond the barriers, the Wulanmulun’s bed is dry.

Daliuta in Shaanxi province sits on top of the world’s biggest underground coal mine, which requires millions of liters of water a day for extracting, washing and processing the fuel. The town is the epicenter of a looming collision between China’s increasingly scarce supplies of water and its plan to power economic growth with coal.

“Water shortages will severely limit thermal power capacity additions,” said Charles Yonts, head of sustainable research at brokerage CLSA Asia-Pacific Markets in Hong Kong. “You can’t reconcile targets for coal production in, say, Shanxi province and Inner Mongolia with their water targets.”

Coal industries and power stations use as much as 17 percent of China’s water, and almost all of the collieries are in the vast energy basin in the north that is also one of the country’s driest regions. By 2020 the government plans to boost coal-fired power by twice the total generating capacity of India.

About half of China’s rivers have dried up since 1990 and those that remain are mostly contaminated. Without enough water, coal can’t be mined, new power stations can’t run and the economy can’t grow. At least 80 percent of the nation’s coal comes from regions where the United Nations says water supplies are either “stressed” or in “absolute scarcity.”

China has about 1,730 cubic meters of fresh water per person, close to the 1,700 cubic meter-level the UN deems “stressed.” The situation is worse in the north, where half of China’s people, most of its coal and only 20 percent of its water are located.

Desert State

Shanxi, the nation’s biggest coal base, with about 28 percent of production, has per capita water resources of 347 cubic meters, less than the Middle Eastern nation of Oman. Inner Mongolia and Shaanxi, which together contribute 40 percent of coal output, have less than 1,700 cubic meters per person.

A government plan to boost the coal industry and build more power plants near mines will lift industrial demand for water in Inner Mongolia 141 percent by 2015 from 2010, causing aquifers to dry up and deserts to expand, according to Greenpeace and the Chinese Academy of Sciences’ Institute of Geographical Sciences and Natural Resources. About 28,000 rivers have vanished since 1990, according to the Ministry of Water Resources and National Bureau of Statistics.

“After five years there won’t be enough water in Ordos in Inner Mongolia,” said Sun Qingwei, director of the climate and energy campaign at Greenpeace in Beijing. “The mines are stealing ground water from agriculture. Local governments want their economies to boom.”

Ordos Wells

Wells drilled near Haolebaoji near Ordos by Shenhua Group, the world’s biggest coal producer, have caused groundwater levels to drop to a depth of as much as 100 meters, drying out the region’s artesian wells, Greenpeace said in a report yesterday. Two calls to Shenhua weren’t answered.

The water that does exist is mostly polluted. A government survey published in February shows that only about a quarter of the groundwater in the North China Plain, an area that’s bigger than Greece and includes Beijing and Tianjin, the province of Hebei and parts of Henan and Shandong, is fit for human consumption.

Severe water pollution affects 75 percent of China’s rivers and lakes and 28 percent are unsuitable even for agricultural use, according to the 2012 book “China’s Environmental Challenges,” by Judith Shapiro, director of the Masters program in Natural Resources and Sustainable Development at the School of International Service at American University in Washington.

China Standout

Geneva-based Pictet Asset Management’s $3.17 billion global water fund doubled its exposure to stocks offering water services in China to 10 percent since 2007. For Zurich-based RobecoSAM’s 611 million-euro Sustainable Water fund, “emerging markets offers the best opportunities in the world for water investments and China is the standout.”

Water-treatment companies Beijing Enterprises Water Group Ltd. and China Everbright International Ltd., which Pictet invested in in 2009, are among its best performers this year, partly on prospects for stricter environmental regulation in China, said Geneva-based portfolio manager Arnaud Bisschop.

Beijing Enterprises has risen 55 percent this year to HK$3.10 and Deutsche Bank sees it reaching HK$3.20 within a year. China Everbright is up 81 percent to HK$7.10 and JPMorgan Chase & Co. estimates it will reach HK$7.60 by mid-October.

Severe Pollution

“The best opportunity is in industrial water re-use, and for the mining industry, it is of the utmost urgency,” said Junwei Hafner-Cai, a manager of RobecoSAM’s Sustainable Water fund. “Water that has been released from the coal mines and from petrochemical plants has resulted in severe pollution on top of the water scarcity.”

A shortage of coal because of the lack of water to mine and process the fuel may force China to increase imports, pushing up world prices, according to Debra Tan, director at research firm China Water Risk in Hong Kong. China, which mines 45 percent of the world’s coal, may adopt an aggressive “coal-mine grab” to secure supplies, said Tan.

Chinese demand will account for 25 percent of global coal imports by 2015, London-based shipbroker ACM Shipping Group Plc said in a report in April. Indonesia is the largest overseas supplier of power-station coal to China, which buys as much as 45 percent of the Southeast Asian nation’s exports of the fuel.

China is responding with harsher limits on water usage, a new tariff structure that allows for steep price gains, and plans to spend 4 trillion yuan ($652 billion) by 2020 to boost water infrastructure and resources.

Water Caps

Caps introduced in January limit the annual increase of water used by the four biggest coal-producing regions to 2.9 percent annually until 2015, while their combined coal output is set to increase almost 5 percent a year, according to CLSA.

In Daliuta, the mine is “sucking up the groundwater,” said Sun at Greenpeace. Trains hundreds of cars long rumble along elevated tracks through the town center, hauling coal. On the highway to Yulin, trucks carrying the fuel queue nose-to-tail for more than five kilometers to pass through toll booths.

The town’s river-turned-pond was dammed about six years ago to beautify the area for new apartment blocks along the banks, said Zhe Mancang, who owns a liquor store nearby. The artificial lake is now contaminated with waste water from the mines.

“I worry about the water,” said Zhe, 58. “But I’ve no choice. My family’s here and my customers are from the mines.”

Reduce Use

The effect of water shortages extends beyond the north. New rules this year require the manufacturing hubs of Jiangsu and Guangdong provinces and Shanghai to reduce water use every year even as their economies expand. Nationwide growth in usage is capped at 1 percent annually.

In the city of Guangzhou water prices rose 50 percent for residents and 89 percent for industrial users in May 2012 to help pay for improvements to quality and supply, according to an April report by Goldman Sachs Group Inc.

Stricter controls will raise the risk of investment in water-intensive industries and heavy polluters including coal, metals and paper production, especially in the north, said Tan.

“In an absolute worst case you’d see a large-scale shift in economic activity and population further south for lack of water, and manufacturing increasingly moving abroad,” said Scott Moore, a research fellow at the Harvard Kennedy School’s Sustainability Science Program in Cambridge, Massachusetts.

Diversion Project

To alleviate the shortage in the north, the central government in 2002 approved the 500 billion yuan South-to-North water diversion project, the largest irrigation project in the world. The plan is to carry 44.8 billion cubic meters of water from the Yangtze river along three routes.

The 1,467-kilometer-long eastern canal to Tianjin is scheduled for completion at the end of this year. The central route to Beijing, more than 1,270 kilometers, is slated to open next year. The western route is still being planned.

Even this massive program may not be enough. The Asian Development Bank said in a report last year that China’s demand for water may exceed supply by as much as 200 billion cubic meters by 2030, according to some estimates, unless “major capital investments to strengthen water supplies are made beyond those presently planned.”

More efficient use would help. Chinese industry uses four to 10 times more water per unit of production than the average in developed countries, Tan wrote in a February report. Only 40 percent of industrial water is recycled, compared with 75 percent to 85 percent in developed countries, the World Bank says.

Yellow River

China has had some success. In the late 1990s, so much water was being taken from the Yellow River, the nation’s second-longest waterway, that it dried up before reaching the sea for as much as 226 days consecutively. After quotas controlled by electronic sluice gates were implemented, the amount of water needed to generate 10,000 yuan of GDP fell to 308 cubic meters in 2006, from 1,672 cubic meters in 1990, according to the Yellow River Conservancy Commission.

China’s efforts to expand alternative energy, including investing $65.1 billion in clean energies like solar and wind power in 2012, aren’t enough to match rising demand. The nation’s dependence on thermal power generation, including gas and oil, will decline by just three percentage points to 76 percent by 2030, Bloomberg New Energy Finance analysts Maxime Serrano Bardisa and Alasdair Wilson wrote in a February report.

Among the biggest losers are farmers, who have to dig deeper and deeper wells to find clean water, or are forced out by local governments that see bigger economic gains from mining.

Abandoned Farms

In Zhanggaijie village, 90 minutes from Yulin city in Shaanxi, Li Qiaoling’s corn harvest slumped to 2 to 3 tons per mu (667 square meters) from 4 to 5 tons four years ago, she said. Li, 43, had to deepen her well to 60 meters from about 30 meters five years ago, she said.

Now she waits with about 200 villagers for compensation and news from local officials on where they will be relocated after coal mining polluted the local water supply, said Li.

“We’re angry because we have to leave,” said Li, who still farms and sells produce from her 11 mu plot, despite the contamination. “We’re worried about moving to a strange place.”

Premier Li Keqiang vowed at a March press briefing to crack down on pollution. “Being rich and well-off isn’t OK either if the environment deteriorates,” Li said.

Implementing such promises has proved elusive. In April, a group of 60 officials from the Ministry of Environmental Protection told Zhang Haibin, an associate professor at Peking University, that they “don’t dare to really monitor” pollution because it would affect growth, Zhang said at a forum. The officials said when “economic growth conflicts, environmental targets always give way,” Zhang said.